Trust for Employee

Trust for Employee

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I have a client which is a private limited company wholly owned by the sole director.  For a number of years now he has employed a manager who deals with the day to day running of the company.  There are no other connections between the manager and the director.

The director has created a settlement into which he has gifted 30% of the company's Ordinary shares (there is only one class of shares).  The Manager is the sole life tenant of the trust.  The trust deed contains provisions for the trustees to lapse the manager's life interest in which case the trust will become a discretionary settlement for the wider class of beneficiaries, being "the employees of the company".

There is usually an annual dividend paid on the shares, the trustee's share of which will be mandated directly to the Manager as life tenant of the trust.

I am fully aware of the CGT and IHT implications of the gift made by the director, but are there any other tax implications? I am particularly concerned as to whether this may be caught under the Employment Relates Securities and/or Disguised Remuneration rules. 

I would be most grateful for any assistance you can offer.

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By slipknot08
05th Sep 2014 13:27

one or the other...

It appears that - unless the employment related securities rules apply (see s.554N for details of the conditions that must be met) - this would fall squarely into the disguised remuneration rules - it meets the ;'gateway test' in s.554A (Part 7A) ITEPA 2003 - A is an employee (or a former or prospective employee) of B and    there is an arrangement (the trust) to which A is a party or which otherwise (wholly or partly) covers or relates to A, and it is reasonable to suppose that, in essence the relevant arrangement is (wholly or partly) a means of providing, or is otherwise concerned (wholly or partly) with the provision of, rewards or recognition or loans in connection with A's employment, or former or prospective employment, with B.

Then, a relevant step is taken by a relevant third person (in this context anyone out of A, B, or any other person - such as the trustee), and it is reasonable to suppose that, in essence the relevant step is taken (wholly or partly) in pursuance of the relevant arrangement.

"Relevant step” means a step within ss.554B, 554C or 554D, and I'm afraid that if it took place after 5 April 2011, the initial settlement of funds will have been that step (within s.554B) meaning that the whole of the capital sum settled - in which A was given a life interest - would be assessable as employment income at that time. NIC is also likely to apply.

There are a number of exclusions and exemptions in Part 7A - from the original question, it doesn't appear that any of them - other than possibly the priority of the ERS rules - would apply.

This is a complex area, but I would say the OP is looking in the right places for potential issues which will arise.

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